Can You Have A Green Trade War?

March 18, 2009

Yesterday, Energy Secretary Steven Chu was musing aloud about carbon tariffs, which could, theoretically, be tacked on imports from any country that refused to do anything about its greenhouse-gas emissions:

Mr. Chu, speaking before a House science panel, said establishing a carbon tariff would help "level the playing field" if other countries haven’t imposed greenhouse-gas-reduction mandates similar to the one President Barack Obama plans to implement over the next couple of years. It is the first time the Obama administration has made public its view on the issue. "If other countries don’t impose a cost on carbon, then we will be at a disadvantage…[and] we would look at considering perhaps duties that would offset that cost," Mr. Chu said.

On an abstract plane, you can see the logic here. If the United States puts a CO2 cap-and-trade system in place, then some energy-hogging industries like cement, steel, and aluminum will find themselves at a real disadvantage compared with their competitors in places like China, who don't have to shell out extra for their fossil-fuel use. At worst, those U.S. companies would all pack up, relocate to China, and pollute to their heart's content—undermining the whole point of a carbon cap. In recent years, many European countries have been exporting a lot of carbon pollution in precisely this way. (The technical term here is "leakage.")

So in strides the carbon tariff. Not only would Chinese manufacturers have to pay for any carbon they use in making exports to the United States, but the tariff would reduce the incentive for firms here to move abroad in order to dodge environmental rules. One analysis from CIBC, a Canadian investment bank, found that if the United States passed carbon caps, China didn't, and the United States then retaliated with a carbon tariff, it would actually cause many manufacturers to move back to North America. That's partly because Chinese companies still rely heavily on coal, so a carbon tax at the border would make it cheaper to make many goods in the United States—even given the disparity in wages.

Now, the seamy underbelly here is that things wouldn't be quite that clean. The United States would slap down a tariff, and China would reply in kind. Escalation and madness ensue. Trade wars get awfully gory, and quick. Also, not many people hold Hank Paulson in high regard these days, but I basically agree when he says that trying to arm-twist China through protectionist means will make cooperation harder, not easier. (As I've reported before, Beijing actually takes global warming quite seriously, and probably needs more in the way of assistance than it does a swift slap upside the head.) There's also the question of whether carbon tariffs even pass legal muster with the WTO—I've seen it argued both ways.

That said, do expect to see this idea flitter around Capitol Hill in the months ahead. Democrats from Rust Belt states are already grimacing hard at Obama's cap-and-trade plan, because they're worried about the impacts on their own domestic industries. (Environmental Defense Fund and other green groups have been trying to sweet-talk the swing senators by pointing to all the clean-tech industries that would spring up in, say, Ohio or Michigan as a result of climate legislation, but as Steve Cochran of EDF told me a few months ago, politicians often just smile skeptically anytime an environmentalist starts talking economic issues.) So a lot of Midwestern Democrats might start asking for carbon tariffs as a requisite for supporting any climate bill. Tricky business.